Two Estonian nationals were extradited to Seattle to face charges that they operated a pair of schemes that brought in $575 million, including a fraud on investors that touted fake cryptocurrency mining capacity.

2 Estonians Charged In $575M Crypto : Initial Court Appearances

Sergei Potapenko and Ivan Turōgin were arrested on November 20, 2022, in Tallinn, Estonia, according to prosecutors, and made their initial court appearances Thursday in Seattle federal court. The two defendants were remanded to custody after the hearing, with their arraignments and detention hearings set for June 10.

2 Estonians Charged In $575M Crypto : Ponzi Scheme Details

Potapenko and Turōgin operated a Ponzi scheme through a purported crypto service called HashCoins OU in Estonia beginning in 2013, according to an indictment. From 2015 to at least 2019, they sold customers contracts that entitled buyers to a percentage of the profits from a pooled remote crypto mining operation called HashFlare, the indictment reads. Through these contracts, Potapenko and Turōgin allegedly brought in about $550 million.

"HashFlare did not own or lease the virtual currency mining equipment necessary to service its contracts," the indictment reads. "In reality, during the course of its operation, HashFlare engaged in virtual currency mining activity at a rate estimated to be less than 1% of the hashrate sold to customers for Bitcoin mining and less than 3% of the hashrate sold to customers for altcoin mining."

Financial Maneuvering

According to the indictment, Potapenko and Turōgin opened accounts at banks around the world, often in the names of shell companies or other people working with them, and transferred victims' funds to those accounts. At times, the defendants would submit false information and fabricated documents to the banks claiming that the shell companies provided products and services to HashFlare, prosecutors said.

Potapenko and Turōgin also allegedly refused to repay customer funds when contacted, implementing minimum and maximum withdrawal amounts on HashFlare. The defendants would sometimes repay customers with crypto they bought on the open market, according to prosecutors.

2 Estonians Charged In $575M Crypto : The Polybius Scheme

In a separate scheme that began in May 2017, Potapenko and Turōgin offered investments in a company called Polybius, saying they planned to form a bank that specialized in virtual currency, according to the indictment. They brought in about $25 million in investment proceeds and used $7 million from HashFlare to start Polybius, prosecutors said, noting that most of the proceeds from Polybius were transferred to other bank accounts and crypto wallets controlled by Potapenko, Turōgin and others.

The defendants allegedly used shell companies and fake contracts and invoices to launder the proceeds before using them to buy about 75 real estate properties, six luxury vehicles, and thousands of crypto mining machines.

Defense Statements

Potapenko's attorney, Mark Bini of Reed Smith LLP, said in a statement to Law360 Friday that his client "is innocent of all of the charges."

"He is an Estonian businessman with groundbreaking businesses that [the U.S. Department of Justice] effectively shuttered with their indictment," Bini said. "We look forward to vindicating Sergei's name."

Turōgin's attorney described him as "a family man and an entrepreneur who started successful businesses with his childhood best friend in Estonia — businesses that flourished and created jobs for many Estonians until the day the Department of Justice, thousands of miles away, decided to bring this ill-conceived indictment. Ivan is innocent of all the charges, and we look forward to the day when we can finally clear his name."

2 Estonians Charged In $575M Crypto : Legal Representation

The government is represented by C. Seth Wilkinson, Jehiel Baer, and Sok Tea Jiang of the U.S. Attorney's Office for the Western District of Washington, and Olivia Zhu and Adrienne Rosen of the U.S. Department of Justice's Asset Recovery Section.

Potapenko is represented by Mark Bini of Reed Smith LLP. Turōgin is represented by Andrey Spektor of Bryan Cave Leighton Paisner LLP and Robert Westinghouse of Goldfarb & Huck Roth Riojas PLLC.